Insurance policy forms are about as much fun to read as the tax code or your credit card agreement. Typically, these forms consist of various parts and pieces that refer back to one another and can only be made sense of using highlighters, sticky notes, and a diagram. Nevertheless, they are critically important documents that set forth your rights and responsibilities as an insured. The time to be familiar with what they say and how they work is before you suffer a catastrophic loss. Waiting to read your policy after the loss is a mistake, and it can be a costly one.

The Indiana Supreme Court recently issued another opinion highlighting the importance of understanding your policy. In Groce v. American Family Mutual Insurance Company and Michael A. Meek, decided on April 3, 2014 (read it here), the Court revisited the question of whether insured homeowners have an obligation to read and understand their homeowners insurance policy. The answer is simple: Yes.

Mr. and Mrs. Groce had been insured by American Family for 10 years before a fire destroyed their home. They had asked their agent, Meek, to provide them with insurance that would be sufficient to completely replace their home in the event of a fire. The evidence submitted to the trial court suggested that the agent had reviewed the Groces’ coverage with them in 2003 and that, when doing so, said, “I’m assuming you want replacement cost coverage. . . if anything ever happens – fire, tornado, wind it (sic: the Residence) will be replaced 100%?”, to which Mrs. Groce naturally replied, “Yes.”

The policy that was issued by American Family was a standard homeowners’ policy form that provided for “replacement cost coverage”. The policy was renewed in the usual fashion from year to year and, at the time of the fire, provided for limits of coverage in the amount of $191,500 for damage to the structure. The policy provided that American Family would pay “the full cost to repair or replace the damaged building, without deducting for depreciation, but not exceeding” repair costs and “the limit in this policy for the building. . . .”

Therein lied the problem.

The estimate to replace their home was $225,245.90; the limits of the policy were $191,500.00. The Groces argued that when their agent asked if they wanted to obtain “100% replacement cost” coverage on their home, and they said “yes”, that the agent breached his duty to obtain the kind of coverage they wanted. That may be true, but the Indiana Supreme Court held that the failure to obtain 100% replacement cost coverage could have been ascertained by the Groces way back in 2003 simply by reading their policy. As the Court put it: “[w]ithout question, the Groces could have discovered that their dwelling loss replacement coverage did not exceed the applicable policy limits.”

The result? The statute of limitations for their negligence claim against their agent (which is a 2-year statute in Indiana) started to run back in 2003 — 4 years before the fire. Their claim was held to be time-barred.

While the Groce case dealt with homeowner’s insurance coverage, the same reasoning applies to business and commercial insurance policies. The moral of the story is clear: Read — and understand — your policy before you suffer a loss!